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Yet to be formed

16 November 2017

A lot of prospective property buyers wish to purchase property to be held in the name of a Company. It might happen that someone is interested in purchasing a property, but they do not have a company already registered to sign the deed of sale agreement. A solution to this is for the prospective buyer to act as agent on behalf of a company yet to be formed when signing the agreement.

Section 21 of the new Companies Act 71 of 2008 provides for an exception to the rule that a person cannot bind a non-existent principal, which determines that a person may act as an agent for a Company to be formed. The Act states in section 21(1) that a person may enter into a written agreement in the name of, or purport to act in the name of, or on behalf of, an entity that is contemplated to be incorporated in terms of this Act, but does not yet exist at the time. The only legal formalities for a pre-incorporation contract under the new Companies Act are thus that the contract must be in writing and must be entered into in the name of or on behalf of the company still to be formed.

The Act further stipulates how much time the law allows for the envisaged company to ratify the pre-incorporation contract made on its behalf, and lays down a default rule to cover the eventuality that the company neither ratifies nor rejects the contract. Section 21(4) states that the board of directors may, within three months after the date on which a company was incorporated, completely, partially or conditionally ratify or reject any pre-incorporation contract or other action purported to have been made or done in its name or on its behalf. In terms of section 21(5), if, within three months after the date on which a company was incorporated, the board has neither ratified nor rejected a particular pre-incorporation contract, or other action purported to have been made or done in the name of the company, or on its behalf, the company will be regarded to have ratified that agreement or action.

The Act also states in sub-sections 21(3) and (6)(b) that if the company, after is incorporation, ratifies the pre-incorporation contract made on its behalf (or if the company enters into another agreement either on the same terms or in substitution for the pre-incorporation agreement) then the individual who represented the company is thereby released from all legal liability, even if the company thereafter is unable or unwilling to carry out its obligations under the contract.

However, the Act makes provision in section 21(2) for anyone who enters into a contract on behalf of a company not yet formed, to be held jointly and severally liable with any other such person for liabilities created as provided for in the pre-incorporation contract while so acting, should the contemplated company not subsequently be incorporated, or after being incorporated, the company rejects any part of such an agreement or action. The Act thus unambiguously imposes personal liability on the individuals who entered into the pre-incorporation contract on the company's behalf if the company thereafter rejects the contract in whole or in part.

The Act therefore sets out various formalities which need to be complied with before pre-incorporation contracts will be valid and enforceable. Considering the implications of potential personal liability, it is advisable to consult an attorney before entering into such pre-incorporation contracts on behalf of a company to be formed.

Daniël van Zyl
Van Zyl Kruger Inc

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